Is Home Depot Amazon-Proof?

The home improvement industry in the US is massive, with Home Depot (NYSE:HD), one of the biggest players in this space, garnering close to $100 billion in sales. Furthermore, the relatively decent operating margin for the company, 15.9% in the second quarter of 2017, may make this sector attractive to e-commerce companies, such as Amazon (NASDAQ:AMZN), that make-do with single-digit margins. The tie-up between Amazon and Sears Holdings in July, through which the e-commerce giant would sell Kenmore-branded appliances on its website, which would be compatible with Amazon’s Alexa platform, sent the stock prices of retail companies such as Home Depot, Lowe’s (NYSE:LOW), and Best Buy on a downward trajectory. While Home Depot has taken a number of initiatives to keep companies such as Amazon at bay, can it really keep up its defenses in the face of a possible onslaught? In this article, we’ll consider both sides of the argument, and give our take on it.

Will Home Depot Flounder In The Face Of Competition?

Amazon has been a massive threat to the retail industry, particularly the apparel and department stores. Until now, the home improvement industry has staved off the competition, but for how long can that last? For Amazon, all it needs to do is chip away at the small-ticket items, such as batteries and bulbs to begin with, by selling them at lower prices. The Tools category, which constituted 7% of Home Depot’s sales in 2016, seems a category that could also be hurt by the Amazon effect, as the products in this category are smaller in size, can be easily shipped, and don’t require any sort of installation or service. With its deal to sell Kenmore appliances, Amazon has shown it is able to move higher upstream, into a category that formed 7.8% of HD’s 2016 revenue.

A factor cited by many that favors Home Depot is its exceptional service. However, there have been rumors that the e-commerce company intends to launch its own “Geek Squad” competitor, such as the one used by Best Buy, which assists customers with the set-up process and can also be used for troubleshooting. At present, Amazon already has a division that sells professional services, wherein individuals, such as house cleaners, handymen, and electricians, can sell their services directly to customers in their area through the Amazon app. Such an avenue can be used to compete with the likes of Home Depot. Another factor that many think can favor Home Depot is the large size of items sold. However, with Amazon entering the bulky furniture business, this reasoning may also not hold true. Furthermore, given its massive size, Amazon has the power to scale any business it wants. Hence, given that Home Depot’s margins may be plateauing, they may not hold strong in the face of Amazon’s onslaught.

Can Home Depot’s Initiatives Hold Firm?

Home Depot has undertaken a number of steps in recent times and invested a considerable amount of money, to seamlessly integrate and cohere its different channels. Its investment has been mostly focused on upgrading its e-commerce offerings in terms of an improved distribution system, better supply chain management, and fully integrating its web and in-store inventory. It even has online content such as how-to tutorials, which eases the use of products by consumers. The company has also observed improved customer satisfaction scores as it continues to invest in these initiatives. In Q2 2017, Home Depot saw a 23% increase in online sales, which was a key driving factor for revenue growth. Online sales now account for 6.4% of Home Depot’s total revenues, indicating that the company has made significant progress in its e-commerce initiatives.

The home appliance industry, which Amazon seems to be targeting with its Sears deal, seems to be more insulated from the Amazon-effect, as customers, in general, prefer to physically inspect such items in a store. This also holds true for other big-ticket items such as paint, flooring, and bathroom fixtures. Furthermore, with the urgency associated with home repairs, a lot of the times it may not make sense to wait for the item to be delivered by a company such as Amazon. Home Depot is also geared towards the big ticket, professional segment, which accounts for 40% of its business, and this segment continues to outpace the growth from the do-it-yourself (DIY) segment. To cater to this segment, the company last year rolled out a delivery program, which ensured products reached in a two to a four-hour window. In 2015, the company also acquired Interline, a home repair and maintenance products seller, and its deeper engagement with this segment has also helped to drive sales. To better serve the needs of the Interline customers, the company has enabled them to use a swipe card linked to their account.

What’s Our Take?

According to our analysis, Home Depot will be able to fend off the competition from Amazon. Home Depot and Lowe’s together command a leading position in the home appliance sector in the US, holding one-third of the market, according to Euromonitor estimates. The two categories that have been highlighted as vulnerable – Appliances and Tools – have actually grown in their contributions to HD’s revenues, from 6.9% and 6.5% in 2014 to 7.8% and 7% in 2016, and seem to be going strong.

Moreover, the company’s focus on the digital space will stand it in good stead in the future. Given the fact that customers today are more digitally engaged, and want more convenience and simplicity, the focus on the digital channel is imperative. More than 50% of Home Depot’s marketing spend is now digital, such as on Google search, Spotify, and Pandora, with the balance expended on TV, radio, and print. Moreover, the company has made significant investments to improve the online experience of its customers. For example, its new expedited online checkout process has cut down the average checkout time of customers by 20%. The online channel also gives customers access to over a million products, compared with about 35,000 items in a typical Home Depot store. The company also has new a feature in its app which helps customers to virtually try out products. For instance, if someone wants to buy a piece of furniture, but has no idea how it will look in his home, the app, using the phone’s camera and augmented reality, can place the item in the room, which can be seen on the phone’s screen. The app also allows customers to find products more easily in the stores.

Home Depot has been specifically focused on products that are e-commerce unfriendly, and where customers need advice from experienced associates in the store. By integrating its online and offline channels, the company has ensured that customers can come to stores for a demo or advice, and then buy the product online. For orders placed online, the customer can pick up the product in store and seek advice at the time of pick up. An interesting point to note is that 45% of the company’s online orders are picked up by customers at the store, indicating that the company’s integrated retail strategy is a driving factor of its e-commerce growth. An additional benefit to be derived from this strategy is that while picking up their orders, the customers are exposed to offers on additional products, as well as other products available in the store. As a result, approximately 20% of the time, the customer ends up buying more than just the original product.

See complete analysis for Home Depot’s stock

Have more questions on Home Depot? See the links below.

• Improving Housing Trends Bode Well For Home Improvement Companies
• Home Depot: Winning In The Multichannel Space
• Improved Housing Market And Higher E-Commerce Sales Result In A Stellar Quarter For Home Depot

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